You don't have to hate oil companies to want to tax them more.

Policy made plain.
April 28 2006 6:16 AM

Well, Well

You don't have to hate oil companies to want an excess-profits tax.

In, I guess, the early 1990s, when I worked for CNN, I found myself one evening at a Washington reception, chatting with an oil-company executive and another from a defense contractor. The oil man said, "How's business?" How's business! Delighted and emboldened by the discovery that businessmen actually say this to one another, I arched a conspiratorial eyebrow and said, "Well, we could use another war."

The defense contractor said, "So could we."

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The oil man said, "So could we—as long as it's in the Middle East."

I was joking, and I'm pretty sure the other two were as well. Corporate executives are human beings (except for Ken Lay). They profit from war, but that doesn't mean they want it. Well, maybe a few of them have mixed feelings about that. But until I see hard evidence, I am not going to believe that American business executives would induce the government to start a war, even if they had the power to do so.

These days, even President Bush is dissing the oil companies. (See Jacob Weisberg's discussion of this elsewhere in Slate.) He doesn't accuse them of starting the Iraq war, of course, but he does now favor looking into other possible misdeeds, such as antitrust violations. For Republican Sen. Arlen Specter and a chorus of Democrats, oil-company misdeeds are enough to justify a tax on their "excess profits."

This hunt for a smoking gun misses the point. Taxes are not a form of punishment. And you don't need to find wrongdoing to justify a special tax on their profits. You only need a pocket calculator—to figure out how much they owe.

The math is rough, but it's not complicated. About a third of the oil consumed in the United States comes from wells in the United States. That's about 150 million barrels a month. The oil industry refers to this as "production," but a more accurate term would be "extraction." Nature produced the oil and charges nothing for it.

Oil is oil, no matter where it comes from, so the price of those 150 million barrels will go up and down with the price of the 300 million or so barrels we import every month. A year ago, that price was about $46 a barrel. Now it's more than $70 a barrel. The cost of extracting those 150 million American barrels depends a lot on how you figure it and varies well by well. But we can make a few reasonable simplifying assumptions. First, no one was forced to pump oil at gunpoint a year ago. So, however you figure it, in April 2005 it must have been possible to extract 150 million barrels of oil out of American ground for less than $46 a barrel, including a reasonable profit.

Costs change. Wells have to be pumped harder or they run dry. Gradually, we are running out and need to import more and more. But these changes are nothing like the fluctuations in the price for which oil can be sold. If 150 million barrels could be extracted a year ago for $46 a barrel, it shouldn't cost much more than that to extract another 150 million barrels in 2006.

Let's round off a bit and say that American oil extractors are getting an extra $25 a barrel. For 150 million barrels a month, that's $45 billion a year. And that's just for the oil that's extracted. The oil that remains in the ground is also about $25 a barrel more valuable. And other energy resources—used and unused—are more valuable by a similar amount.

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